UPDATE 2-Bouygues lifts core profit and heats up telco price war

* Shares in French telcos sag as price war heats up (Recasts with new cut-price telecom offer, CEO comments on sector, Alstom stake)

By Natalie Huet and Gwénaëlle Barzic

PARIS, Feb 26 (Reuters) - French construction-to-telecoms group Bouygues unveiled higher core profit and a new low-cost fixed line package on Wednesday, heating up a domestic price war that has been weighing on revenue.

The conglomerate said it would rely on a robust construction business and competitive telephone packages this year after savings at its telecom and television units helped lift operating profit by 5 percent in 2013.

The owner of France’s third-largest telecom operator and TF1 , the country’s biggest private broadcaster, has been slashing costs to cope with a price war sparked by the 2012 launch of Iliad’s low-cost Free Mobile service.

The fierce competition has fuelled intensive speculation about potential consolidation in the French telecoms sector.

Vivendi-owned SFR, France’s second-largest mobile phone operator, has already been approached over a tie-up with cable firm Numericable, and a source close to the talks said this was prompting rivals, such as Bouygues and Iliad, to consider bidding too.

Chief Executive Martin Bouygues said he was keeping a close watch on the situation but refused to comment on talk of a possible tie-up with SFR.

Bouygues recently struck a deal with SFR to share part of their mobile networks, a move through which it hopes to save 100 million euros a year from 2017-2018.

With its latest triple-play offer, which it says will enable French households to save 150 euros per year on average, Bouygues Telecom now also aims to reach 20 percent market share in the domestic fixed-line segment as soon as possible.

“We believe that a mature market like this one needs to be shaken up with innovative offers,” Chief Executive Martin Bouygues told a news conference.

He declined to say what margins the group would be achieving with the offer but said that for some operators, the fixed-line segment currently featured Ebitda margins above 40 percent, similar to those of luxury goods.

The new triple-play package includes television, Internet and unlimited calls to landlines for 19.99 euros ($27.45) a month. Iliad immediately hit back by saying it would include more TV channels free of charge in its own entry-level offer.

Shares in Bouygues, which had rallied at the open on the back of the annual results, trimmed their gains after the announcement and were flat at 30.24 euros at 1253 GMT. Shares in Iliad fell 7.8 percent, Orange 3.8 percent and SFR parent Vivendi 1.8 percent.

BOUYGUES “COMFORTABLE” IN ALSTOM DESPITE WRITE-DOWN

Bouygues forecast sales this year would be close to 2013 levels and kept its dividend stable at 1.60 euros per share.

Cost cuts at Bouygues Telecom reached 599 million euros last year, but the unit’s earnings before interest, tax, depreciation and amortisation (EBITDA) came in at 880 million, slightly below a target of 900 million. Sales fell 11 percent to 4.7 billion.

The group, which also builds roads, said current operating profit rose 5 percent to 1.34 billion euros ($1.84 billion) last year, even as sales dipped 1 percent to 33.3 billion. Analysts polled by Reuters expected operating profit of 1.3 billion on sales of 33.2 billion.

However, Bouygues registered a full-year net loss of 757 million euros, the first net loss since 1995, following a 1.4 billion writedown on its 29 percent stake in train and turbine maker Alstom.

While its construction business and road unit Colas both had higher order books last year, up 3 percent and 6 percent respectively, Alstom has been hit by a drop in orders for power equipment, and its contribution to Bouygues’ annual net profit fell 30 percent to 168 million euros.

Alstom’s cash burn and depressed shares had prompted Bouygues to write down the value of its stake by about 31 percent earlier this month.

The move has fuelled speculation that Bouygues might be getting impatient and looking for the exit, but its CEO called Alstom a “remarkably well-managed business” and said heavy industry was a cyclical sector that would eventually see an uptick in orders as the economy improves.